Difference

• Gross pay is an employee's income before subtracting qualifying pretax deductions, such as a Section 125 medical or dental plan or flexible spending account, or a traditional 401(k) plan or a 403(b) plan. These deductions must meet IRS requirements to qualify as such. Taxable gross pay is an employee's earnings after subtracting qualifying pretax deductions; the result is the amount that is subject to taxation. If the employee does not have pretax deductions, her entire gross pay is also her taxable wages. Section 125 plans are not subject to federal, and in many cases state and local, income tax. Traditional 401(k) and a 403(b) plan are subject to Medicare and Social Security tax withholding but not federal income tax withholding; state and local income tax withholding requirements vary. Pretax deductions reduce an employee's taxable wages.
  
  

Gross Pay Calculation

• To arrive at an hourly employee's gross pay, the employer multiplies the employee's total regular work hours -- those up to 40 -- for the pay period by her regular pay rate. If applicable, the employer multiplies overtime hours -- typically, those exceeding 40 for the week -- by the employee's overtime pay rate. He adds both the regular and overtime earnings to arrive at total gross pay. For salaried employees, the employer divides the annual salary by the number of pay periods in the year to arrive at gross salary for the pay period. An employee's gross pay can also include additional compensation, such as bonuses and commissions.
  
  

Taxable Gross Calculation

• To figure out taxable gross pay, the employer subtracts the pretax benefit from the employee's gross pay. For example, if an employee elects five percent of her gross weekly salary of $800 to go toward her traditional 401(k) plan, the employer calculates as follows: $800 x .05 = $40. The employer subtracts $40 from $800, which leaves $760 -- this amount is the taxable gross for federal income tax purposes. However, since a traditional 401(k) plan is subject to Social Security and Medicare taxes, the employee's withholding for these two taxes would be based on $800. If she had a Section 125 medical plan, her taxable gross pay of $760 would apply to federal income tax and Social Security and Medicare taxes. An employer must check with his state or local revenue agency to know if it includes pretax deductions for state and local income tax withholding purposes.
  
  

Considerations

• Section 125 contributions are nontaxable; however, traditional 401(k) and 403(b) contributions are taxable when an employee withdraws from the plan and her money is distributed.